Also published on the Huffington Post
As spring progresses, the real estate market continues to be competitive. Buyers are doing all sorts of things to get houses beyond writing a “pick me” letter. In some cases, the risks they are taking are tough to justify. As an agent, I have to protect my clients as best I can. I give them the information they need but ultimately they make the final decision.
So what really happens when a buyer, wanting to make their offer more competitive, waives one contingency — or all of them? Well, they put themselves at risk of losing their earnest money deposit, but let’s look at each one in depth.
Home Inspection: In this market buyers are afforded the ability to inspect a home in one of two manners — a general inspection in which they forfeit their right to negotiate with the seller for any repairs, or a home inspection where they can go back to the seller and ask for compensation or repairs. Sellers hate both of these inspections, but if given a choice, the general inspection is definitely less risky to the seller. There will be no more negotiation but, it still leaves an open window of time where the buyer can walk away for any reason.
A regular inspection is the seller’s nemesis. Many buyers think it’s because the seller is hiding something. I’m not saying this hasn’t happened but it usually isn’t the real reason. Sellers don’t want buyers to get regular inspections because they don’t want to fix anything, they don’t want to give an additional credit for broken items, and they don’t want to see a copy of the inspection report. Once they see the report and are made aware of every deficiency with their house, they are obligated to tell a future buyer about it should the current buyer decide to walk away.
We never advise clients to waive inspections. Sometimes they choose to on their own, but it’s not a good practice.
Another contingency to protect the buyer is the appraisal. If the property appraises below the contract value, the lender will only underwrite the loan for the financing percentage the buyer specified. If the buyer was putting 20 percent down, the lender will only finance 80 percent of the appraised amount, not 80 percent of the contract price. If the buyer wants the property and has the money to bridge the gap, it’s not an issue. But, a low appraisal brings all parties back to the negotiating table to reach a mutually accepted solution. The choices include the buyer kicking in the extra money, the seller reducing the price to the appraised value or a combination of both. If not, they can walk away.
If a buyer has additional cash in reserve and isn’t unwilling to use it, waiving the appraisal is not as risky.
The final contingency is financing. This is risky to waive only from the aspect that the financing approval is ultimately up to the lender. Online lenders, credit unions and other banks where you’re just a number are usually not a good bet to use if you plan to waive financing. Local lenders who know the market and get documentation from the buyer typically have no issues approving their loans unless the buyer does something unforeseen, like spends their down payment. But if the buyer does everything they’re supposed to, was honest about salary and assets, doesn’t lose their job, and interest rates don’t go through the roof overnight, then lender approval isn’t a difficult hurdle. There is a way around the entire hurdle though. Many lenders can pre-underwrite buyers which is an excellent advantage to have. Only then can a buyer then waive the financing without risk.
Contingencies exist to protect buyers, and seeing them waived in the name of getting a house is unfortunate and dangerous. There are plenty of stories of buyers who were encouraged to waive inspection completely and they paid dearly for it. The risk-taking buyers don’t believe it though until they see rain outside their window… and rain coming through their ceiling into the middle of their living room.